Reprise-"Waves of worry over freight rate fall"

Straits Times senior correspondent Goh Eng Yeow had pretty good newsprint given that his above captioned article occupied half of the last page of the friday 2nd July 2010 edition of the paper. I gave the article more than a once over as I find the topic intriguing and the reporting could perhaps do with a slightly more balanced view than make the fall in the Baltic Dry Index as a plausible sign of slowing down of China's economy. Eng Yeow has done well in listing some factors that make the Baltic Dry Index a good leading indicator of China's economic growth like:

1. The Baltic Dry Index is not a tradeable index and therefore a more transparent indicator. I whole heartedly agree with remisier Alan Goh on this point but perhaps we should also consider that not being tradeable could also make it less reflective indicator due to a smaller market and lower denominator also and whether 41% drop was seasonally adjusted as well.

2. A similar pattern in late 2007 and mid 2008. The fact that both events happened together does not proof a co-related event. Perhaps it should also be mentioned that the service component of China's economy has most probably occupied a larger share of her GDP as it is quite a norm when a country progresses economically and economically surely China has progressed without a shadow of doubt. As the services share of the economy takes more centre-stage, the Index is also likely to be a weaker indicator as services are less co-related to the index.

3. While it is rightly stated that new export orders fell by more than 2% point after adjusting for seasonally lower February output, this might not be a very good causative argument firstly because US is still the largest trading partner as compared to EU. Secondly, China has slowly but surely been increasing her trade with former Soviet Union eastern bloc countries as well as Soviet Union as well especially in the area of energy related sector especially in natural gas which will reduce China dependance on oil for to meeting her energy needs.

4. Perhaps the recent action by China to allow RMB to have a wider band could have affected cost parity to come into play and therefore augmenting the argument that the Index has gone down in-spite of lower import cost for China to import now than previously.

On the whole, I would like to credit Eng Yeow for the good write-up as well as sounding the bulge horn call for a possible nightmarish event that is likely to happen and hope that he takes my comments positively.

Cheers,,,, Pete aka lkypeter

Safe Harbor. Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Peter Lye